Taught By

Michael S. Gutter, Ph.D.

Professor

Transcript

So in this presentation, we're going to talk a little bit about the concept I like to call Managing Your Flows. So let's think a little bit about this. Going back to our model of financial security, we begin by talking again about this idea of cash and credit management. So with cash and credit management, we have some specific things we focus on. Right, number one, we budget for a targeted surplus. That means that the purpose of managing our money is so that we have enough funds left over. Number two is that we have enough money. Available to us at any given point, so that we're able to meet all our obligations. And that includes our savings obligations. We want to be efficient in our use of financial services as well. This includes everything from banking on, an insurance and other types of services. And we want to be engaging in prudent tax planning, which is something we'll learn a little bit more about. In further modules. So remember right, the key to financial security begins with managing our flows. So why plan your spending and saving? Well number one, it helps to see if you actually have extra money left over every month. We may feel like we're not getting ahead, but that may just be a feeling. By documenting it and getting some numbers behind it. We get a sense of where we really are, with respect to financial status. It can also help to reduce stress. I don't know about you, but if you've ever felt like you weren't sure if you had enough money to do something, it can wear on you a little bit. So to keep the stress associated with financial management down, having some organization, getting a sense of where we are with our spending. Can be very helpful in alleviating that. We want to see whether or not our money is going in and coming out at the right times. And we have a calendar tool that'll be on this website that you can download, that can help you to take a look at this. And we'll review the calendar in just a few moments. But that timing of the money can be just as important as whether or not we have enough. And also can help us to prepare for things like occasional or seasonal expenses, things that happen quarterly, things that may happen once or twice a year. This can include birthdays holiday gifts and other types of things. Even holiday travel. So let's review the planning cycle then when we think of money management, right. So we're going to begin, with this idea of setting goals. Right and we're going to have some goal setting worksheets as we get into savings, but this is the idea of laying a foundation for what we want to do. What are the objectives of our financial management. Then we think about the idea of gathering information. This is going to involve tracking our expenses. Getting a handle on our bills. Seeing the money that's coming in. Making sure we understand the money that's going out. We're going to write a plan. And we're going to call that a budget, for lack of a better term. Or as I like to refer to it, the B word. We then work the plan. We need to see whether or not the budget is actually working for us. And as we work the budget, we look at and ascertain whether or not it is effective. If it's effective, then we leave it as is. And we keep trying to work it until something changes. If however we see that our budget isn't effective, we don't have enough money leftover, we're not able to meet all our obligations. Or we have nothing leftover for us to enjoy life with, then we may need to make some changes to the plan as well. So let's remember, right, the cycle that we're going to think about. So let's begin by identifying your income. Show me the money. So, we want to think about salaries, wages, cash assistance, benefits, any assets that we could sell if we absolutely had to, if money was needed for debts and emergencies. Now we don't want to think that at any given point, selling an asset is no problem. And that it should be our solution to any money woes we have. In fact, most physical assets really, can be challenging to sell. We may not get what we wanted to out of them. Now, what if we don't know how much money our income will be? So some of us work on commission, some of us work for tips, some of us work on odd hours where our hours change from week to week. Sometimes we have overtime, sometimes we don't. So, there's many fluctuations for this. When we think of creating a budget, we want to focus on the idea of what's the normal, what's our average amount of income that we are going to be receiving, not the most and generally, not the least either, but somewhere in that middle. So using that average amount can be very good. If you are very pessimistic. And very concerned and it stresses you out, you can go with the lower amount of that income range, but my suggestion is always just to try and think a little bit about the average. If you're going to use the calendar, then this monthly income actually is going to be on page nine of that Money Management Calendar that you'll have. Now let's track our current spending. Now this, there's many different ways for this. There's apps you can download on your cellphones you can get many different web services. I'm going to show you my favorite here, simple sheet of paper, I fold it in half, not once, not twice. But thrice, now when I unfold it, [SOUND] you see a piece of paper with eight boxes. That's a box for every day of the week plus, a shopping list or a totals list that you can put on there. This is something that when you keep it nice and folded up. Can go right in your shirt pocket, in your jacket pocket, [SOUND] something you can keep track of with a handy small pen or pencil, and jot things down as you're making expenses. This is a pretty nice low tech way, to keep track of your spending as you're going forward. So keep all the receipts. You can keep them with it. You can staple them to it. You can put them all in an envelope and indicate that you have the receipts. You can come up with categories for your expenses once you get a sense of where your money's going, how much is coming in, and how much is coming out. And then write these amounts in the UF Money Management Calendar, every day if you can, or at least once a week. Take your folded up sheet of paper, and transfer it to the Money Management Calendar. Again, a great way to be tracking your expenses. This is that information we talked about. It's really hard to plan a budget, if we have no idea where our spending is going. Right, in other words if we don't have a record of it, we're just guessing with how much money we spend. And that can be pretty and also very dangerous in the sense that we could be dead wrong. So then we build the budget, we iden, we take a look our expenses and we figure out what are the fixed, what are the consistent expenses, and we can think about what some of these are, rent or mortgage. Utilities may be fixed, depending upon the type of utilities we're talking about. Our debt payments, whether it's to student loans. Whether it's to a car. All of these things can be relatively fixed or consistent in nature. Meaning that they're going to be the same, from month to month. We can also have more flexible expenses. These are expenses that occur regularly. But they vary from amount to amount. So food is a great example of this. Even if we mostly spend our money at the grocery store, there'll often be some variability with a few dollars here or there or even more, from each grocery shopping experience. If we eat out a little bit as part of that time too, that's also going to vary as well and have some flexibility in it. And it's flexible also in the sense that we have some control. We can decide not to do some of these things. We can decide a little bit ,about what we're going to purchase or what we're not going to purchase. The generics versus the name brands, so on and so forth. And clothing, would be another great example of this. So, think to yourself, what are some of my flexible expenses? What are some of the things I have to pay? What expenses do I have that are the same every month? And what expenses do I have that go up and down a little bit, that fluctuate? We also want you to think about, those emergency funds. So, this again, should be roughly equivalent to three to six months worth of your expenses. So, as a fixed expense category, you want to go ahead and account for savings. And in particular start with building up that emergency fund, so that we have enough money held up in liquid reserves, so that we can meet ends, they can make ends meet for at least about three to six months if we can. Another budgeting tip too, is that as we're building this, think about those occasional expenses we mentioned. The birthdays and such that are going to come up. And, allocate for those. One way I like to do it, is you have something every month, then you could just think about budgeting for these holiday or gift expenses. If you have a few times a year that you need to buy for, you might average those over a 12 month period, so that you have to put away roughly the same amount of money every month. Towards those gifts and expenses. Now, this is good because then it doesn't create a shock to your financial system, in any given month where you might have that holiday or seasonal expense. Now let's take a look at that calendar then for a moment here. So, calendars can be really helpful. One of the nice things I like about is, it's going to map out things. When the money's coming in. When the expenses are going out. The other thing is that it helps us to foresee, certain shortfalls that may occur. Let's take a look at a really important one here. So at the beginning of the month, we have rent due. $500. Now this works out pretty well for someone, right? They know when their payment's due, that's a fixed expense, we get that part of it. The challenge is they get paid on the 6th, $750. They make enough money to pay their rent, but what's the challenge they're facing? The rent is due, before they get paid. And assuming that even if they have a little bit of bigger room with their landlord. Most of the time it's not going to extend all the way out to the sixth. So we want to think about, what do we need to do? Well, this is someone that needs to be engaging in budgeting, right? If they withheld money from the two weeks prior, from the previous paycheck, towards the rent, then they're going to be just fine to make this rent payment. So that's one of the reasons why budgeting can be important is, even if you make enough money for all of your expenses, the timing of when the money comes in. When the money goes out, cannot line up. And if it doesn't line up, then we're not just going to randomly have enough money to pay the bills when they're due, we're going to need to plan ahead for that. A calendar's a great visual reminder then, for those types of cash flow mismatches, when the timing isn't going to be quite what we need it to be. So helping to make sure that we take a look at the calendar is a great idea. Calendar, right, in the way that we present it to you, also. You can use it to keep your bills. You can stuff your bills in there for the current month. So that can be helpful. Again, you can think about the timing of things, paying a bill in advance, especially. If you're going to have certain interest that's going to be charged, paying in advance when you have the money can be beneficial. The calendar helped us as we can remember the timing of income, the timing of expenses. It also helps us to get a sense of when our expenses. Typically are bunched. Do we have a lot of expenses in the beginning? Do we have a lot of expenses in the middle? Or are we really evenly spread out throughout the month? These are just things that can help us as we start planning ahead, as we start trying to get more and more organized with our finances, those visual cues can be very helpful. So, the calendar helps us to foresee, right, and to see. A cashflow problem. Do we have enough money, and more importantly, do we have enough money at the right times? Remember that when we talked about one of the importance of cashflow management, was about liquidity. Do we have enough money at the right times, as opposed to always, do we have enough money overall. So we add up the amounts in the flexible expense column. Are we right where we need to be? Are we budgeting so that we are spending less than what me make? That's what we would call a surplus. Or are we spending more than what we make, which is what we call a deficit. We add up the fixed and flexible expenses, we see whether or not we are dominated by fixed or rigid expenses. Whether or not we are dominated by flexible expenses, meaning we might have some discretion in how much we spend. And again as always, income minus expenses, is going to tell us whether or not we have a surplus or a deficit. Okay. And, lastly, do we need to plan ahead? Do we. Save the amount we need for occasional expenses or are we someone that tends to scramble in the last minute and say ooh, oh no, we forgot we had so and so's birthday, now we need to go ahead and get them a present. Or we promised we'd take them out to dinner for their birthday, we need to have extra money in the budget for going out to eat that week. So, as always, right, reviewing and revising is a critical step here. Now what if when you're looking at your budget. You know it just doesn't match up. Assuming that you've been tracking your expenses, you may have some legitimate concerns. So, how can we increase our income or increase our resources? Well, you can try and get a second job. That can, sometimes be easier said than done. You can always ask for a raise. Find a better job. Try and you know, improve yourself, improve your lot in life. If you're sharing resources or expenses with someone, a family member could get a job as well. Or change the nature of what they're doing so that they can bring in a little bit of extra income. Learn to do things yourself. Because we certainly can save a little bit of money on home repairs or other types of small things we need to do, if we're able to take care of those their selves. Although as always, we say that doesn't mean we should start doing our own dentistry or other things, right? Often times it's best to let a professional handle certain things. Another great example that's come up a lot more nowadays, is bartering or trading services. So you might be really good at helping people with technology or with their computers, you need someone to come help who has a lawn mower to make sure your lawn is taken care of. You can trade off some services, no money takes place, right? Everybody gets what they needed. And again, we're able to potentially save some of our cashflows. But give a little bit of our time, which sometimes is more accessible to us than extra money. But just some food for thought there on the bartering or trading services with friends or members of your community. So with increasing income, just a few specifics we can do, right, investing in your education, like many of you are doing right now. Can certainly be beneficial to you, you can get new licenses, you get degrees, get certifications, these are not always free to get, but the payoff can sometimes be very beneficial and justify the necessary expense. We'll look at with taxes a little bit about our personal exemption withholding from paychecks, maybe we need to make a difference there. We might need to take advantage of some tax deductions or tax credits, that we're avai, eligible for. So, if we have children, this may be part of it. If depending upon our income level we may be eligible for others. So, also we want to recommend too that when it comes to taxes, seek out and utilize things like free incomes tax assistance sites, also called FITA sites. These are a great way to make sure you get your full refund, as well as not incurring an additional tax expense. So lots of ways we can think about increasing the cash inflows, right, and let's also think equally, about checking the cash outflows. So, do we compare prices when we shop. Not anymore, right? If you have a smartphone, there's a million apps you can probably use to do this, but comparing prices is something that may seem out of style, but let me assure you, it's never gone out of style. We want to take the time to do it. We shouldn't, hopefully, be in too big of a rush for any purchase. That we can make sure we're getting the best deal. Do we use coupons? Well, we don't want to necessarily buy everything that we have a coupon for, it's great if we have a coupon for everything that we know we needed. So as always, make sure we set that shopping list first, right?, and use coupons if we have them,right? And a few other things too when you do go shopping. Don't go shopping when you're hungry if you can avoid it, right? And it's very helpful to have a list to avoid spontaneous purchases of that really exciting new cereal that's on the shelf that you've always wanted to try. Do you think ahead about your needs? So trying to start planning ahead a little bit more. A calendar can be helpful for that, it forces us to look ahead in the coming months, and see what things might be happening. We can get some reminders for that and also taking of what we own can be very important. Now someone may think, well how does this avoid spending? Well it avoids you having to spend more money to repair things, to get things replaced, and this includes everything from eyeglasses to technology, to vehicles. Taking care of those with proper maintenance. If it's our eyeglasses. Put them down in a safe place to avoid somebody sitting on them, or a dog chewing on them, or anything of the sort. So we want to take care of the things that we own so that we get full life from those purchases. We don't have to replace them in a short time frame, so we can have them live at least as long as they were intended to. We want to reduce or eliminate spending on any wants we have. Needs are something we often can't avoid, wants are something we should be considering. A great way to do that is to not carry your credit card around with you. That can help to avoid it. My rule of thumb is to keep it in a bag of water, frozen in the freezer. And, of course, that means if I actually want to charge something, I have to go get it out, thaw it. That takes a lot of time, but it always makes me think twice about anything I was planning to charge. We might want to modify or reduce those flexible expenses. That's where we have some wiggle room. Car pooling, limiting our eating out, grocery shopping, electric and water. Try and keep track of all of those, maybe even get on a budget plan when it comes to our utilities. When it comes to eating out we can trade off with friends. Maybe someone cooks dinner in this week, then we sort of rotate through that. Typically cooking dinner is still going to save a little bit of money versus going out for the same types of meals. So and then also can you change your fixed expenses? This often requires a little bit more restructuring. So it may not be something we can just choose to spend less on, but for example, if we have a high insurance premium, we might shop around and see if we can get a lesser expensive one. At some point in time, sometimes recon, re-consolidating or reconstituting debt. Can be a useful exercises, and may also help to save money on our fixed expenses every month. So, can we choose to change our flexible expenses, and can we modify our fixed expenses, are two of the things we look for in our spending leaks. So how much should we spend? These are just some averages to give people a ballpark for different expenses. Food this is again a percentage of their monthly income is one way to think about this. So food is between 13 and 15%. Housing is anywhere from 32 to 42%. The recommended guideline is right around that 28% benchmark for a mortgage especially. But again we, you know we there's always some allowances depending on people's priorities. Child care, right for those of us in need, 15 to 25% clothing, 3.8 to 4.2% transportation and other biggie, and then of course things like education recreation, gifts and contributions, miscellaneous emergencies and insurance all of these expenses can add up to quite a bit of our overall income,. And again, savings is 0 to 10%. We want to make sure that's as close to 10% or more, if possible, right? Making sure we set aside money for other needs including emergencies. So to get to those percentages, just divide the amount you spend by the amount you take home. So $450 for rent divided by $1,200 of income equals 0.375 or 37.5%. Is that in the range we should be at for housing? Is that a little bit on the high side? A little bit on the low side? Those are some of the questions we can ask ourselves. When we look at these percentages, we often refer to this as vertical analysis of statements. So, we get a sense of saying, are we spending more than we ought to on a particular category? Little expenses can really add up. Let's just take a Coke, or a Diet Coke if you, if you will for a dollar a day. If we bought that in a vending machine, right, er sorry, one per day. The vending machine, a dollar per day, or around $260 a year if we only do that during the working weeks. If we bought it at a store it's forty-two cents a day, or $105 a year. That's going to save us $155. So, while some would say just don't drink the soda, we'll at least say, if you're going to drink the soda, maybe buy it in advance at the store and save yourself quite a bit of money, save $155 a year. So, there's usually some wiggle room in a lot of our expenses with just a little bit of advanced planning. Buying the diet coke at the store means, I've gotta bring it with me to the office, I've gotta bring it with me to a campus, I've gotta bring it with me to a job. So, it takes a little bit of advanced planning, but is going to save you money in the long run. So often times that little bit bit of extra time. Pays off with the extra money. Let's talk about the long term cost of snacks right. $2 per day or $60 per month if we invested $60 per month at 7% for 30 years, how much of those daily snacks costing you? $157,000. Think about that for one moment. Over the next 30 years just by not snacking at the vending machines wherever you're going everyday, $157,000 over the 30 year period. When people say well how will I have enough money for retirement. That's not too bad at least in terms of starting us on the right path and all that took was giving up some daily snacking. So remember you've gotta work this plan. Set a month with money day. This can be for yourself, or with the significant other, if you're sharing dispenses, or even with room mates sit down once a month and review the budget the calendar can be a very visual tool for that. Looking again at what expenses do we have, what income do we have coming in. If we see that we're going to have money left over, that can be an exciting time to think about what would we do with that money, again, would be buy something for the home, where we save it for something that were all trying to make happen,. But it allows a family or a household to think about what they want to invest their savings in. If you spent too much and you realize you went over, what are you going to cut back on? That's really important, because if you're sharing resources with someone else you can choose to cut back as much as you want to. But if that plan doesn't have consensus, you may be the only one sacrificing. That can, of course, create some challenges in a household unit. But it also means you're not going to make the progress you want to on your budgeting. And remember, accuracy's important, too. If people are guesstimating amounts. Try and get to a point where we can have a little more accuracy with those numbers. Actual statements that may be coming in, encouraging someone to keep that folded up piece of paper around so that they can write down the amounts, as they're coming up. So again, we'll take a look a little bit more at how we can review some of these statements, and looking ahead at how we can manage our resources and analyze and create financial statements in the next presentation. Thank you.

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